To manage exchange rate risk activity, Tiffany’s objectives should be to minimize foreign exchange rate risk and lower counterparty risks. We want to minimize these risks because Tiffany & Co. is selling goods that are denominated in US dollars, but sold for yen in the Japanese market. The objective of this program is to prevent the depreciation of the yen against the US dollar by hedging the currency. The expected Japanese sales of Tiffany & Co. should be actively managed by purchasing hedging contracts continuously on expiration of previous contract.
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1. In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?ans: he first alternative was to sell yen for dollars at a predetermined price in the future usinga forward contract.
2. Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why not?
3. If Tiffany were to manage exchange-rate risk activity, what should be the objectives of such a program? Specifically, what exposures should be actively managed? How much of these exposures should be covered, and for how long?
4. As instruments for risk management, what are the chief differences of foreign-exchange options and forward and futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage exchange-rate risk? 5.How should Tiffany organize itself to manage its exchange-rate risk? Who should be responsible for executing its hedges? Who should have oversight responsibility for this activity?